Edmunds.com suggests spending less than 20 percent of your income on your car payment after your gross monthly income, or the amount you take home after taxes. This suggestion might not work for everyone, as personal affordability depends on current debt and financial situation. Before you apply for a loan, consider the various costs of owning a car to make sure all ownership costs fit your budget.
Creating a Budget
Assess your current debt and present or future financial situation to determine how much of a car payment you can afford. If you live at home with your parents or have no other debt, you may be able to afford more than 20 percent of your income. If you plan to change jobs or suspect you may be unemployed in the future, consider future affordability. Calculate your monthly income and subtract your monthly bills to view how much money you have left over. Then, based on your own personal spending habits, decide how much you can reasonably afford to spend without limiting yourself.
Considerations
Your car loan payment is only a fraction of the costs that you'll pay for your vehicle. Most auto loan providers require a full coverage insurance policy during the term of your loan, which is the most expensive insurance policy you can purchase. The amount you can pay for your full-coverage insurance can equal or exceed your car payment amount. Determine your maintenance and gas costs, as well. Talk to a dealership or service shop to determine costs of regular maintenance, such as oil changes, tire rotation or recommended servicing. Budget for all ownership costs, not just your monthly car payment.
Auto Loan Calculator
Use an auto loan calculator to decide your vehicle price range and monthly payment amount based on different loan scenarios. Edmunds.com offers several loan calculators. Enter in your target monthly payment to view the amount of vehicle you can afford. Use the calculator to view average rates, tax charges, dealer fees, term options and various down payment scenarios, all of which play a big part in your monthly payment amount.
Preapproval
Obtain a car loan preapproval so you can be sure of your interest rate and car payment. When you apply for a preapproval, use the information you gathered using various scenarios from the auto loan calculator, such as price range, term and down payment with consideration of tax and fees. You may not obtain the car loan you wanted; banks determine down payment requirements, rate and term based on credit history and income. Based on your approval rate, alter your price range to shop for a vehicle that fits within your budget.
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